EC 110 Final Exam Practice Test
Table 16-1: The following table shows the percentage of output supplied by the top eight firms in four different industries. Which industry is the most competitive?
Industry D
Refer to Figure 16-5. Which of the graphs depicts a short-run equilibrium that will not encourage either the entry or exit of firms in a monopolistically competitive industry?
panel a
A good is excludable if
people can be prevented from using it.
If the cross-price elasticity of two goods is positive, then the two goods are
substitutes
A tax on an imported good is called a
tariff
The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called
the Coase theorem
The term tax incidence refers to
the distribution of the tax burden between buyers and sellers.
What must be given up to obtain an item is called
opportunity cost
Refer to Figure 16-9: The figure is drawn for a monopolistically-competitive firm. The firm's maximum profit is
$0
Refer to Figure 15-7. A profit-maximizing monopolist would earn profits of
$120
Refer to Figure 15-7. In order to maximize profits, the monopolist should charge a price of
$20
Refer to Table 17-1: Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge?
$30
Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?
$8
Scenario 15-7: Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate?
$850,000
Monopolistic competition is characterized by which of the following attributes? (i) free entry (ii) product differentiation (iii) many sellers
(i), (ii), and (iii)
Critics of advertising argue that advertising
- creates desires that otherwise might not exist. - hinders competition. - often fails to convey substantive information.
In the prisoners' dilemma game, self-interest leads
- each prisoner to confess. - to a breakdown of any agreement that the prisoners might have made before being questioned. - to an outcome that is not particularly good for either prisoner.
Which of the following is an example of a barrier to entry? (i) A key resource is owned by a single firm. (ii) The costs of production make a single producer more efficient than a large number of producers. (iii) The government has given the existing monopolist the exclusive right to produce the good.
(i), (ii), and (iii)
The higher the concentration ratio, the
- more control an individual firm has to set prices - less competitive the industry
Advertising
- provides information about products, including prices and seller locations. - has been proven to increase competition and reduce prices compared to markets without advertising. - signals quality to consumers, because advertising is expensive.
Figure 16-10: The figure is drawn for a monopolistically-competitive firm. In response to the situation represented by the figure, we would expect
- some of the firms that are currently in the market to exit. - the demand for this firm's product to increase, assuming this firm does not exit. - this firm's profit to move from its current value toward zero.
Refer to Table 17-1: Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold?
1,200 gallons
Refer to Figure 15-7. In order to maximize profits, the monopolist should produce
12 units
Refer to Table 17-21: John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). How many Nash equilibria are there in this Chicken game?
2
Suppose the income of buyers in a market for an inferior good decreases and a technological advancement occurs also. What would we expect to happen in the market?
Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
Refer to Table 17-21: John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). If John chooses Turn, what will Paul choose to do and what will Paul's payoff equal?
Drive Straight, 20
Refer to Figure 16-3: This figure depicts a situation in a monopolistically competitive market. Which of the following will occur in the long run in this industry?
Firms will enter this industry
For a profit-maximizing monopolist,
P > MR = MC. Price > Marginal Revenue = Marginal Cost
Refer to Table 17-21: John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). What is Paul's dominant strategy?
Paul has no dominant strategy.
If Shawn can produce donuts at a lower opportunity cost than Sue, then
Shawn has a comparative advantage in the production of donuts.
If Shawn can produce more donuts in one day than Sue can produce in one day, then
Shawn has an absolute advantage in the production of donuts.
Refer to Figure 16-3: This figure depicts a situation in a monopolistically competitive market. This firm is operating
in the short run and earning a positive economic profit
At present, the United States uses a system of quotas to limit the amount of sugar imported into the country. Which of the following statements is most likely true?
The quotas are probably the result of lobbying from U.S. producers of sugar. The quotas increase producer surplus for the United States, reduce consumer surplus for the United States, and harm foreign sugar producers
Refer to Table 17-21: John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). If Paul chooses Drive Straight, what will John choose to do and what will John's payoff equal?
Turn, 5
A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called
a Nash equilibrium
What is the shape of the monopolist's marginal revenue curve?
a downward-sloping line that lies below the demand curve
Elasticity is
a measure of how much buyers and sellers respond to changes in market conditions.
A firm that is the sole seller of a product without close substitutes is
a monopolist
A price floor will be binding only if it is set
above the equilibrium price
Foregone investment opportunities are an example of
an implicit cost
Refer to Table 17-21: John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). What is (are) the Nash equilibrium (equilibria) in this Chicken game?
b. John: Turn Paul: Drive Straight c. John: Drive Straight Paul: Turn d. Both b and c are Nash equilibria
The fundamental source of monopoly power is
barriers to entry
Refer to Figure 16-9: The figure is drawn for a monopolistically-competitive firm. Efficient scale is reached
beyond 133.33 units
A group of firms that act in unison to maximize collective profits is called a
cartel
A legal maximum on the price at which a good can be sold is called a price
ceiling
An agreement among firms in a market about quantities to produce or prices to charge is called
collusion
Goods that are rival in consumption but not excludable would be considered
common resources
On a graph, the area below a demand curve and above the price measures
consumer surplus
The decrease in total surplus that results from a market distortion, such as a tax, is called a
deadweight loss
The prisoners' dilemma provides insights into the
difficulty of maintaining cooperation.
Product differentiation causes the seller of a good to face what type of demand curve?
downward slopping
The market demand curve for a monopolist is typically
downward slopping
In a perfectly competitive market, the process of entry and exit will end when
economic profits are zero
Negative externalities lead markets to produce
greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.
A negative externality
is an adverse impact on a bystander.
A dominant strategy is one that
is best for the player, regardless of what strategies other players follow.
A tax burden falls more heavily on the side of the market that
is more inelastic
"Other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well." This relationship between price and quantity supplied
is referred to as the law of supply.
Demand is inelastic if the price elasticity of demand is
less than 1
For a monopolist, marginal revenue is
less than price, whereas marginal revenue is equal to price for a perfectly competitive firm.
In order to sell more of its product, a monopolist must
lower its price
A monopolistically competitive firm chooses the quantity to produce where
marginal revenue equals marginal cost. MR=MC
A profit-maximizing monopolist will produce the level of output at which
marginal revenue is equal to marginal cost. MR=MC
Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm
must lie entirely below the average total cost curve.
Refer to Figure 15-1. The shape of the average total cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure?
natural monopoly
Refer to Figure 17-3: Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows: If this game is played only once, then the most likely outcome is that
neither Hector nor Bart cleans.
Scenario 15-7: Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC. If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit?
price = $150; profit = $450,000
A profit-maximizing firm will shut down in the short run when
price is less than average variable cost.
Refer to Figure 17-3: Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows: The dominant strategy for Hector is to
refrain from cleaning, and the dominant strategy for Bart is to refrain from cleaning.
If one person's use of a good diminishes another person's enjoyment of it, the good is
rival in consumption
Price discrimination is the business practice of
selling the same good at different prices to different customers.
"Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." This relationship between price and quantity demanded is referred to as
the law of demand
A production possibilities frontier is bowed outward when
the rate of tradeoff between the two goods being produced depends on how much of each good is being produced.
If a firm produces nothing, which of the following costs will be zero?
variable cost
The price of a good that prevails in a world market is called the
world price